Do you make the apartments carry the debt and treat the storefronts as upside, or underwrite both to the same standard?

On the management side the thing that makes version one honest is the expense loading, and I don't think you've done it. If the residential has to stand alone you also have to carry the ground floor's share of the roof, the parking lot, the trash, and the snow. Retail tenants generate more of that than 12 apartments do, per square foot, especially a laundromat with a grease trap situation and a groomer with water use. Your 1.08x is probably closer to 1.0x once you stop pretending the bays cost nothing while they're vacant.

I'd rather see you underwrite the retail at contract rent and hold twelve months of retail rent in a separate reserve line. Same conservatism, and the number is defensible because you can point at the bank statement.

kestrel, does the tenant mix change your answer? A laundromat is a machine business with a long buildout and a real cost to move, so its renewal odds look nothing like the insurance office that could be gone in a weekend with two laptops. I'd underwrite those three bays at three different levels of confidence rather than one blended haircut.

Version one, and I say that because in the markets I look at the retail half has no floor at all. Small town main street, if the bay goes dark the next tenant is whoever wants it, and sometimes that's nobody for two years. I've stopped writing retail income into the primary case entirely.

But I'll grant beacon's point that a streetcar suburb with foot traffic isn't the same animal. If your bays face a sidewalk that people actually walk on, you have a market. I mostly don't.

I own one 8 over 2 and the thing that broke my version-one thinking was the lender, not the property. My bank sized on the whole building's NOI whether I liked it or not, and my conservative internal number was just a personal comfort blanket sitting next to a loan that assumed both halves performed. Confirm in writing how yours sizes it before you decide which spreadsheet is real, because they vary a lot on this.

Also the 70% haircut isn't arbitrary if you can tie it to something. Mine is: contract rent minus the cost of six months down and a $22 per foot tenant improvement allowance, amortized over the remaining term. That's a number I can show someone.

thicket said the important thing. You get to pick your underwriting, you don't get to pick the lender's.

On my small multifamily deals, the reason I lean toward making the apartments carry it is that residential vacancy is a two-week problem and retail vacancy is a two-quarter problem, and my liquidity is what actually kills me, not my IRR. cobalt is right that I underestimated the ground floor's share of the shared costs on my first one. The trash bill alone was almost double what the unit count suggested because the restaurant bay filled the dumpster by Wednesday.